Self-assessment and post-clearance audit in Customs
By V. Sridhar
In the Budget of 2011 changes were made in the Customs Act, 1962 so as to introduce a new concept of self-assessment and post-clearance audit. This article briefly analyses the new provisions, their implications to the revenue administration and to the community of importers and exporters.
Before getting into specifics, it would be useful to refer to a trend that has been emerging over the past few years in the administration of both direct and indirect taxes. I am referring to what is called the “non-intrusive type of tax administration”. Broadly, the features of non-intrusive tax administration are to have a robust IT system, a comprehensive and quality database and the systems and tools to analyse the database that will assist and strengthen the revenue administration and make it more effective. Such a system would be markedly different from an intrusive manner of administration which is characterised by increasing scrutiny of more and more tax returns and import/export documents and fraught with delays.
A simple example of a non-intrusive system is the installation of closed circuit cameras. In a non- intrusive system, the very existence of a comprehensive database would induce greater tax payer compliance. Experience with direct taxes bears this out. The impressive growth in direct tax collections over the past few years is attributable in part to the Tax Information Network put in place by the Income Tax Department. Likewise on the Customs side, the valuation database has assisted the department in checking undervaluation of imports. What all this means is that, for the compliant tax payer things have been made easy while for the others the compliance levels have improved. In a growing economy a non-intrusive system has been found to yield better results than the sledge hammer approach of high level of scrutiny, searches and investigations. It must, however, be emphasised that the punitive part of administration has it’s own vital role.
Coming now to the specific changes introduced on the Customs side, the provisions relating to assessment (Section 17 of the Customs Act, 1962),provisional assessment (Section 18),filing of entry documents of imports and exports (Sections 46 and 50) and provisions for realisation of short levy and interest (Section 28) have seen a major overhaul. As per the new provisions, an importer or exporter has to file his declaration electronically and the moment a number for the document is generated in the computer system, the document is deemed to have been filed and self-assessment is completed. It is as simple as that! The law also provides that a proper officer may verify the self-assessment and if found necessary, re-assess the goods. The words ‘may verify’ indicate that such verification or self-assessment will be done in select cases and presumably the Risk Management System (RMS) of the EDI would assist in the selection of document for verification. Basically, a trust based system has been introduced wherein the general rule would be to accept the importer’s declaration and allow him to pay duty as per his assessment.
A self assessed bill of entry would, however, be subject to a post-clearance audit (PCA)at the Custom House. The PCA would also be done selectively using the RMS. For a certain class of importers the PCA at the port of import by the Custom House officials would also be done away with but replaced by an “Onsite Post Clearance Audit’ (OSPCA).The Central Board of Excise and Customs have clarified that to begin with, the facility of OSPCA would be extended to those covered by the Accredited Client’s Programme (ACP) which was a part of the earlier system. ACP clients are established importers satisfying some basic criteria.
OSPCA implies visit to the premises of the ACP importer by the officers of Customs and Central Excise once a year to audit their import related documents and books of accounts. Importers are required to preserve relevant records for the previous 5 years. The term ‘premises’ would include the registered office, factory, warehouse, etc., where the imported or export goods and connected books of accounts, record of transactions and other documents are ordinarily kept by an importer or exporter. The audit team can scrutinise the records or examine the goods and finalise their report after discussing their views with the importer/exporter.
The new system, if implemented in proper spirit both by revenue officials and the trading community, can be expected to result in faster clearance of cargo, reduce dwell time of ships and reduce transaction costs to the trade. The Department too would benefit by taking a holistic view during audit (PCA or OSPCA) and concentrate on sensitive areas. The techniques of audit should be more sophisticated using statistical analytical tools. The very possibility of quality PCA or OSPCA can be expected to improve compliance in correct description of goods and their valuation including MRP/RSP, passing on of discounts that are claimed, fulfilment of export obligations under various export incentive schemes, etc. The importer/exporter would be well advised to improve their record keeping. They should also strengthen their internal controls either through in-house expertise or through hired experts so as to improve their compliance levels or for that matter to ensure that all legitimate benefits and concessions are duly claimed.
All over the world bureaucracy is shrinking. The current trend is to roll back the frontiers of the government, to use Margaret Thatcher’s evocative phrase. The volume of trade is increasing year after year. New ports, airports, ICDs and land customs stations are being set up. At the same time there is a revolution of rising expectations with the trading community demanding faster clearances. In line with the international trend, self-assessment, Risk Management System and onsite post- clearance audit are ideas whose time has come.
[The author is Director, Institute of Business Laws, Chennai & former Chairman, Central Board of Excise & Customs, India]